Podcast: What’s Next For Europe’s Airlines?

EasyJet’s takeover and airBaltic’s restructuring headline a period of change as European airlines adapt to new competitive, financial and capacity pressures. Listen in as David Casey, Victoria Moores, Richard Maslen and Edmond Rose break it all down.

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David Casey (00:10): Hello, and welcome to Window Seat, Aviation Week's air transport podcast. I'm David Casey, editor-in-chief of Routes. Welcome aboard. Well, it may be holiday season for many, which can be a traditionally quieter period for aviation news, but there's been no shortage of big stories across Europe in recent weeks. In this episode, we'll take a closer look at some of those developments and consider what they mean for airlines, airports, and passengers. Now, one of the biggest stories over the summer so far is easyJet's agreed takeover by US private equity firm, Apollo Global Management, raising questions about what private ownership could mean for the airline and Europe's wider competitive landscape. Elsewhere, airBaltic shrinking its A220 fleet and seeking fresh financing. Europe's largest airline groups are slowing their capacity plans as fuel costs remain high because of the Middle East crisis, and the European Commission has proposed extending its emissions trading system to more international flights.

(01:08): Elsewhere, passengers are also facing lengthy queues at some airports as the EU's new biometrics border system struggles with the summer peak. So joining me to discuss these developments and the wider outlook for the European aviation market are some familiar faces and some familiar voices. We have Victoria Moores, European and Africa bureau chief at Air Transport World. Edmond Rose, consulting director at Aviation Consultancy ASM, and Richard Maslen, head of analysis at CAPA Centre for Aviation. So Victoria, Rich and Edmond, welcome back to Window Seat. So let's start with easyJet. When we last spoke about the LCC on the podcast in early July, the US firm Castle Lake appeared to be in pole position to buy the company, and at the time it was the only potential bidder. However, since then, easyJet has agreed to Apollo's offer of seven pounds, 15 pence per share, which values the airline at about 5.7 billion pounds or 7.7 billion US dollars.

(02:10): Now that has the support of easyJet's board and founder, and Castle Lake has now withdrawn from the process. So Victoria, can you bring us up to speed on what's the latest with this? Why has easyJet switched its recommendation from Castle Lake to Apollo, and what now needs to happen before that takeover can move forward?

Victoria Moores (02:30): Yeah, so what we saw, David, was we saw this unanticipated Castle Lake approach to try and take over the whole of easyJet. And as a reminder, easyJet is a very significant airline in Europe. I think it ranks number two in terms of seat capacity in Europe this summer. They've got a fleet of nearly 360 aircraft, around about 1,200 routes. So we've got a sizable airline, so anybody coming in to try and take over easyJet has got to have some firepower behind them. At the time when Castle Lake approached, easyJet's shares closed the day before at 3.94. And what we saw was Castle Lake progressively increased their bid five times and ultimately did get recommended by easyJet. And then all of a sudden we saw Apollo come in, which is another US investment company. Apollo came in straight with a seven pounds, 15 per share offer compared with the six pound 90 offer from Castle Lake.

(03:32): But I think that the two significant parts here are the fact that there was speculation, and I'm going to stress it was analyst speculation that Castle Lake might consider breaking apart easyJet. Whereas Apollo, looking at what they've got in mind for easyJet, it seems very much that they'd want to continue the airline's growth strategy to really continue the development of the business as is, albeit likely delisted from the looks of the offer. I think that the second significant thing about this is the fact that easyJet's founder, Stelios Haji-Ioannou, he is in support of the offer. And I think that that in itself was one of the key factors. It was absolutely guaranteed that Stelios and his family would retain their shares and then participate in this latest round. So with that in mind, they've recommended it to their shareholders and we're in a bit of a wait and see process.

(04:25): Hopefully the process will complete by March 2027, but obviously there's all the various regulatory hurdles to go through yet. But yes, he's yet very much switched from supporting the Castle Lake bid over to the Apollo bid and Castle Lake's now out of that process, but it'll be a huge shift in ownership of European aviation. Potentially for us in terms of coverage, privately owned companies don't have to disclose as much as listed companies, so that could shift our visibility over what's going on behind the scenes at the company, but certainly a big moving story to watch over the coming months.

David Casey (05:00): Absolutely. So it is moving forward, but I'd say there are some important regulatory questions around the deal yet in terms of the ownership and the control, especially with the European Commission planning to review airline ownership rules later this year as well. So the debate about that is not going to go away. Now, Rich, easyJet, as Victoria said, it's a very strong brand, has valuable slots at constrained airports, substantial Airbus order book, but its shares have underperformed and its costs remain considerably higher than the likes of Ryanair. What has made it such an attractive target for private equity?

Richard Maslen (05:36): Thanks, David. Yeah, I think Victoria summed up a lot of it there when she mentioned about the share price. It's quite clear that the share price that easyJet has at the moment is a lot lower than what you would expect it to be. As a business, you've got a very recognizable European brand. You've got a large, relatively scarce portfolio of slots of airports where access is difficult to replicate, the enormous Airbus order book that's there, and you've got a growing holidays business, and they're valuable assets to any kind of business. You mentioned about Ryanair. There's a fairly obvious gap between easyJet and Ryanair where they are, and you could think perhaps that the earning opportunities for easyJet are a lot stronger under Apollo when the deal is concluded, if it is. The comparison with Ryanair is difficult because Ryanair has relentlessly pursued cost-discipline aircraft utilization while easyJet has had a slightly different business model looking at serving more expensive airports, looking at a bit more in terms of regular schedules rather than occasional flights during a week.

(06:40): So it's complex to compare them directly. You could question all why as a low-cost airline when you're trying to minimize costs as much as you can, would you say that easyJet was being run very differently? They've adopted a very different business model to other low-cost airlines, and that sets them apart very seriously. And I think that's what Apollo sees as the opportunity there. And I think when you get private equity getting involved, you're not looking at necessarily reinventing the airline. A lot of people may think that's the case. Basically now it's going to be a case of delivering higher returns. So there is a return on this investment that Apollo's making. So if you can improve the cost base a little, extract more from the fleets, increase ancillary revenues further and grow the holidays and loyalty businesses, obviously easyJet's looking to launch a new loyalty program, that will be a very interesting opportunity there.

(07:34): You're not going to need to double the size of easyJet, turn it into a super business to make this investment work. I think that's probably the most interesting part of this transaction. It's the opportunities less about buying growth, but rather buying underrealized value that's already there within the business.

David Casey (07:51): So it's not necessarily about making easyJet bigger, but it's getting more value out of the business that already exists. Let me bring you in here, Edmond, and talk a little bit more about the network. As we've said, easyJet's focus on primary airports gives it a really strong position that it's difficult for competitors to replicate, but those airports are obviously more expensive to serve, and they probably explained some of the cost gap between easyJet and Ryanair. Do you expect Apollo to push easyJet towards more lower cost airports and markets, or do you think the network strategy will be similar or the same as what it is now?

Edmond Rose (08:28): If we take what Apollo has said as read, and they have said that they want to keep the existing strategy, the existing management team's strategy, and they want to essentially develop what is happening and including things like the loyalty program that is imminently going to launch, we're told, and optimize the network, I just do not think it would make sense for them to go charging off into a loss of different types of market. Coming back to the cost point, yes, the primary airports carry higher costs with them, but I suspect there are other areas of EZJ's costs which are also high. And unless you can radically cut those, you're not going to be able to make that switch into more of the non-primary airport markets. So I think two things that we see, the loyalty program coming up and costs suggest they want to carry on with the more premium focus, and that means the primary airports.

(09:37): One other point is it's quite hard to imagine them, for example, coming out of those positions they have at the primary airports, the constrained primary airports like Amsterdam and Orly and Gatwick, because it's quite hard to, for example, find somebody else who's going to take it over and provide you a monetary sum for doing so. And selling off slots piecemeal might make you a bit of money, but you are effectively selling your ability to earn the premiums that easyJet earns.

David Casey (10:13): So from a consumer's perspective then, probably not much will change with the network. Is that fair to say?

Edmond Rose (10:20): Exactly. I wouldn't expect significant change. I do wonder if for a period they will be more cautious about some of their network changes and focus on making the most of what they have, but let's see.

David Casey (10:40): Okay. Well, moving on from easyJet now, let's turn to a different European airline, which is facing a very different set of challenges. Now that is airBaltic, the Latvian state-controlled carrier, and it's the largest airline in the Baltic region. Until recently, it was pursuing a very ambitious growth strategy ahead of a planned IPO. It was the aim to build a hundred aircraft by 2030. It's now sharply scaled back those plans, and under its revised business plan, it wants to shrink its fleet from 54 aircraft to about 36 by the end of this year. Now, Victoria, tell us a little bit more about what's happening at airBaltic. Why exactly is this approach being taken, and how has it reached the point where it really needs to cut back on its fleet and its network?

Victoria Moores (11:28): I think to understand the situation at airBaltic, you need to cast the clock back a bit. So historically, they had a multi-aircraft fleet under leadership of former chief executive Martin Gauss. He consolidated that fleet to make it all A220-300s. So you move from this variety of aircraft to try and make it as efficient as possible under one aircraft type. And he saw that the airline needed to grow to make it sustainable to bring down unit costs. So he came up with this plan to expand to 100 A220-300s by 2030. That included the schedule flying and also ACMI work for other airlines. The challenge is that by moving to that single fleet, there was a dependency on that single fleet. And we've had the Pratt & Whitney powder metal issues with the engines, which caused a lot of disruption, particularly as that was the sole fleet for airBaltic.

(12:23): They were particularly hard hit by that. On top of that, you've had the conflict in Ukraine, which caused them to have to pivot their strategy. You've had more recently the unrest in the Middle East, demand issues, and all of that knocks through onto the bottom line. So what we've seen them doing is they've had to, since Martin Gauss's departure, they've revisited that strategy. They've come up with this revised business plan, which really does scale down those growth ambitions. And they are looking for immediate interim financing. They've had to renegotiate with their bondholders. They did mention at the time when they were announcing the results of their bondholder discussions, this ensures the continuation of airBaltic's operations, which to me really does show that this is a tight liquidity situation. They've got a bit of breathing room through until November. The question is whether or not they're going to be able to secure that interim and longer-term financing over the next few months.

David Casey (13:23): Definitely. And as part of that retrenchment, they've said they're going to concentrate more on the Riga hub. So that means pulling back in some of the markets where they've expanded in Estonia, Lithuania, Finland, for example. And I know they do some seasonal flying as well to the Canary Islands with some seasonal bases there. Edmond, what do you think the retrenchment will mean for airBaltic's network, Riga's position as a hub, and connectivity in the wider Baltic region? Do you expect it to create opportunities for Ryanair and Wizz, for example? Is this the right move for airBaltic as well at this time?

Edmond Rose (13:58): So the obvious thing for them to do is to retreat more into the flying out of Riga. It's their principal base, it's where they're registered, and it is also providing a bit of a hub. They carry quite a lot of connecting traffic over Riga, so perhaps a bit of doubling down on that. As Victoria mentioned, the war in Ukraine has deprived them of what was previously more of a hub opportunity from Russia, between Russia and the Nordics, and indeed into Western Europe. So that's not coming back quickly. As far as we can tell, there's no great progress in the ending of that war. So for airBaltic, they'll have to focus more on their Riga hub in my view. But you mentioned the operations they have in winter from other places. That of course is part of the same problem that every airline in Northern Europe faces is that you get less opportunity, particularly for leisure traffic in the winter.

(15:14): And some of the flying that airBaltic has been doing for the winter and has in the schedule for this coming winter may look a bit unusual because it's particularly from the Canary Islands to other places in Northern Western Europe. But if you're going to try and use your fleet properly, then that's what you need to do. So I don't know that that's all going to disappear. It is a way for them to manage the seasonality. And seasonality was a big problem with their wet leases. So their Lufthansa Group agreement has, I think, only five aircraft on wet lease in the winter. So they're trying to tackle several problems at once, but one of them is seasonality. And with Riga as a hub, maybe they have more of an opportunity by doubling down on Riga to sort out some of that seasonality.

David Casey (16:08): Looking at some other European carriers, we've had a number of financial results in recent weeks. We've heard from the likes of Lufthansa who has dropped plans to increase capacity by as much as 2% this year, and is considering more cuts to its short-haul network. IAG has also moved from growth, I think from under 3% to broadly flat capacity. And Air France-KLM has also lowered its growth forecast this year. Rich, taking the market as a whole, how would you characterize the health of the European aviation market this summer? Is this a pausing growth from some of those carriers or do you think airlines are becoming more cautious for the longer term?

Richard Maslen (16:49): You say pause. I think pause probably is the right word for it. It's not a big seismic change, but this is a fairly revealing development as we are. It's a strange situation to be in because as we look currently, if you're to believe all the headlines, airlines should be struggling ridiculously. European aviation should be at the floor with everything that's going on. It is performing remarkably well. We have a really strong European aviation industry, and I think that's where the complexity comes into it. We have to remember we have a healthy industry. I've been on numerous flights over the last couple of months for our events, and every single one of them has been full. And the fares that I'm paying for most of the tickets are probably 20% more than what I paid last year, for the examples that I had. So we're seeing a strong demand and also strong yields for airlines.

(17:46): So that's really helping them saying that the cost of fuel has made a big impact on these airlines. So I think where we are, the results from Air France-KLM, Lufthansa, and IAG, they're probably what we expected, but we may have thought that they would actually be a lot worse than they were given the impact that the operations from February to even still today. They've been protected by the hedging. They're quite highly hedged, all three groups around the 70 to 80% of their fuel costs. So that's offset a lot of the additional costs that they're facing from fuel. So that will change moving forward. And I think the longer that the crisis potentially goes on, it will have a notable impact on it. And I think that's the bigger concern for European airlines right now is not price of fuel and how it's changing.

(18:44): It's the uncertainty of how long we are going to be in this environment. Seeing some of the headlines this morning of what's latest things between the US and Iran. It's not healthy for an industry that is already facing a lot of complexity. We do have to remember that we're still talking about growth. We're still talking about the 1%. And 1%, that's a lot of flights for these large airlines. So you can't say we're in a really bad situation of losing cutting routes, cutting capacity in a lot of places. It's trimming capacity. It's trimming routes. It's ensuring that the aircraft are in the right markets that they're flying to ensure you get the best return on them. I think the distortion we have now going into the second half of the year is the first half, the Gulf airlines were seriously impacted by what was happening.

(19:40): They really retrenched their operations. Those big hub carriers, the Emirates, the Qatar Airways, they're building their networks back up to almost what they were before the crisis began. So that's going to have a stronger impact on European airlines over the second half of the year, and that's something that we're going to have to look closely. So I think we have to be even more cautious of the second half than what we've seen in the first half. I think from the industry perspective, I would say European aviation is healthy, as healthy as it could be in the circumstances. And I think what it needs to do now is just rediscover the difference between passenger growth and profitable growth, because that's ultimately where we need to be moving forward.

David Casey (20:22): So certainly not a lack of demand then we're seeing, but it probably means that airlines have got less room for error than perhaps previously. When you think about the network then, Edmond, obviously when fuel prices rise, airlines become more selective about how they deploy that capacity. How is that affecting network decisions? Are you seeing that playing out and what airports or routes or markets are most vulnerable to any rise in that fuel price?

Edmond Rose (20:49): The obvious answer is that new routes that are untried and untested are the ones that are most vulnerable. So if I'm working for an airline in network planning and I'm worrying about uncertainty or high fuel prices, I'm more likely to be conservative and not go for something untried and untested before I leap into something new. I want to be sure that it's going to be better than something some route I already have, and that's hard to prove.

David Casey (21:22): Let's turn now to an operational issue affecting passengers this summer, which is the EU's new entry exit system or the EES, which replaces passport stamping for short-stay visitors from outside the EU, including from the UK and the US, with a digital record of when they enter and leave the Schengen area. Now, passengers must provide passport details, facial images, and fingerprints. And the overall aim is to strengthen border security and identify people who potentially overstay in the bloc. Now, Rich, I know you've had experience with this. What has the EES rollout looked like across Europe this summer? You've probably seen the best and the worst of the system, haven't you?

Richard Maslen (22:05): Yeah, I think I have, to be honest. As I said before, I've traveled quite a lot and I've had a mixed experience. I think, again, we have to remember here, there have been some real horror stories of people trapped in airports, missing flights, but there's also been the positive stories which you don't hear about. So we have to balance them up quite clearly between the one or two really negative stories and probably the hundreds where everything has gone fine. I think the interesting thing about this isn't the technology itself that's been introduced. It's the whole complicated European border architecture behind it all. So I've had examples where I've transited through a major hub airport in Europe and it's taken me 30 seconds, used the machines, got through, been perfectly fine. I've had others, and it's particularly when you have a short connection of 45 minutes, but I've been stuck there for 45 minutes waiting to get through.

(22:58): And then when I've got there, literally 30 seconds, I'm through. So it's just a volume issue. But the thing that worries me, I've seen just quite recently is the technology may be failing to communicate between one country and another country's system. So I fell into that hole just recently when I arrived in Amsterdam one evening before continuing onto Frankfurt where I stayed the night. So the following morning I was flying off on a long-haul flight from Frankfurt to Vietnam. And I got to the border and unfortunately they wouldn't let me through because they said, "Unfortunately, Mr. Maslen, you haven't arrived in Europe." Those weren't the exact words. They were a bit more forceful than that. And I was in shock and I was a bit uncomfortable with it all. And it actually took about 30 minutes. And I actually got to a stage that I was feeling really uncomfortable because they were forcing me to prove that I'd flown from the UK into Europe.

(23:55): And this was no fault of my own. I'd used the machines correctly in Amsterdam, but unfortunately the system there hadn't updated for the German system the following morning. So I thought, okay, this has got to be an isolated issue. And I went on to speak to a few people in the industry, and actually it's been quite common, especially among business travelers. But back to the serious issue here, for aviation, this is all quite uncomfortable because from the passenger perspective, they don't see this as a European policy initiative. They see it as, "Why am I stuck here in a queue?" For airports, it becomes an issue in terms of managing these queues, space in the gates and terminal to ensure they can handle all this. They're losing quite a lot of revenue as well in terms of spend within the airports. The passengers are potentially stuck at border posts rather than actually in terminal buying food and drink.

David Casey (24:52): Well, if the EES is providing an immediate operational challenge, another story that we've seen making the headlines recently is the proposed EU emissions trading system, which is a longer term cost and competition issue for airlines. Now, Victoria, I know you've been writing a lot about this for the next issue of ATW Magazine. Before we end this podcast, and I'm sure we could probably do a complete separate podcast on the ETS, but maybe just recap what the commission is proposing and why it's managed to attract not only criticism from airlines, but also from environmental groups as well.

Victoria Moores (25:28): Yeah, it's quite special that the commission appears to have managed to upset everybody with this one. Like you say, the environmentalists and the airlines and even the airlines that technically benefit slightly from this. So let me run through briefly what the changes are. So from 2029, the EU is proposing that the EU emissions trading system should be extended. At the moment, it's just intra-EU. They're suggesting that it should be extended to include departing flights within a 5,000 kilometer range of the center of the EU, which is actually Frankfurt Airport. That's where it's going to originate from, which is quite an interesting choice in itself. This means that Middle East flights, so hubs like Dubai and Doha would be included within the ETS. Also, Turkey would come within it as well. Basically what we're seeing is obviously the Arab air carriers are not very happy about this change.

(26:30): Clearly the commission is looking to tackle some, what they call carbon leakage to make it so that airlines can't just fly passengers to a hub just outside of the EU and then fly them on without any environmental levies basically taking effect against them. But I did quite like the comment from AACO on this. Their response was that this is arbitrary, unilateral, extraterritorial. It has no legal basis, environmental threshold or internationally agreed methodology. So I think we conclude they're not very happy about that. And we're hearing a lot of commentary even from the Asia-Pacific airlines, from the Latin American airlines, which again, they won't fall within the scope saying we really need to focus on CORSIA. Taking this fragmented approach isn't the right approach for the environment. I think it's also interesting if you get a little bit deeper into the regulatory proposal itself. What we're seeing is the EU is actually proposing to slow down the rate at which the cap is tightened on emissions.

(27:33): So they said that basically if we carry on the trajectory that we're on now, it's going to mean that we're going to overshoot our ambitions. So what we're going to do is at the moment, the rate at which it is reducing is 4.3%. Ultimately, that's going to drop down to 1.7% under the proposals from 2036. So I think that's quite an interesting takeaway. Couple of other bits coming up there for me is that airlines that use sustainable aviation fuels have been able to claim ETS credits so that they can offset the increased costs of their fuel. What the EU is proposing here is that hybrid aircraft, electric aircraft, hydrogen aircraft would be included and eligible to receive some of those benefits. Although the amount of support that's being offered while the overall pot of cash is increasing to make it accessible to obviously Middle East airlines will now be able to claim these benefits.

(28:31): The challenge is that the support for the various propulsion mechanisms themselves is reducing. I was speaking to an SAF producer and their chief executive said at the moment, airlines can claim up to 90% of the cost difference back. Now they can only claim 60% with an extra 10% if the SAF is EU produced. And I thought that that was really interesting that particularly something like SAF that the EU really wants to ramp up may benefit under this from a little bit less support. We're also getting hints towards book and claim being possible under the new proposals, albeit under a very specific system. Contrail management will be incentivized for the first time under ETS. And also there's going to be more national revenues to be pushed into ETS sectors. So overall, it's quite a big shift. I think we're going to see a lot of pushback against particularly that 5,000 kilometer range proposal.

(29:30): Right now, we're going to have to be in a wait and see. We'll hear more on this as the council and the parliament finalize their positions on the proposals by the end of this year. They're looking to get it through very quickly in the first quarter of 2027. So I think we're going to see a lot of talk and a lot of commentary around this subject over the weeks and months to come.

David Casey (29:50): So it's clear that there's a long way to go before this becomes law. And I guess, as you said, the details may change and there's going to be a lot of talking between now and the coming months. So I think we've covered a lot of ground in this podcast already. We've covered a lot of the big stories from easyJet, airBaltic, capacity growth, ETS, and the entry exit system. So that is all we have time for Window Seat this week. So thank you for listening and thanks to our producer, Cory Hitt. Thanks again to Rich, Victoria and Edmond for joining us as well. If you enjoyed this episode, make sure you like and subscribe wherever you get your podcasts. But until next time, this is David Casey disembarking from Window Seat.